Readers who own London property will feel understandably smug. Last week's residential Poll of Polls from estate agency Chesterton Humberts shows average house prices in London are nearly 13 per cent higher than February 2009. Average prices are about to smash through the 2007 peak – and most prime central London locations have already achieved this feat. Looking ahead, the property website Rightmove.co.uk says asking prices for London properties in February broke all records.
However, a growing number of property experts think that the London bubble is soon to burst. Foreign buyers, who account for 80 per cent of transactions in some areas of the capital, have turned London into a market driven by exchange rates rather than mortgage interest rates. Their dominance has mutated the property market in a way not seen anywhere else in the UK, and many question the sustainability of the London house price boom as a result.
There is already evidence that the looming election is acting as a brake on the London market, with one estate agent reporting a 75 per cent drop in houses put on the market this month. With stock levels at record lows, will prices start another upward leg – or will buyers say enough's enough?
National picture
The London phenomenon is not a national one. The Chesterton Humberts survey shows that average house prices are still falling in Scotland, the north east and northern Ireland (where prices have slumped -8.4 per cent in a year). Yet London's strong performance skews the national average house price indices (which, until last month had reported 7 months of consecutive rises). There are two key factors behind the rapid gains: the weak pound, and low levels of property on the market.
Overseas buyers see London property as a safe haven for their cash - and the weak pound is making it a cheap one. In the past year, agents have reported large groups of (with many moving funds out of Swiss bank accounts to escape Silvio Berlusconi's tax clampdown), and wealthy buyers from unstable economies across Eastern Europe, Russia and Greece have all been piling in, seeing a London home as a safe place to invest.
No surprises, then, that profits surged 320 per cent at the upmarket estate agency division of Savills, which reported its . Chief executive Jeremy Helsby confirms that 50 per cent of the residential division's business is from overseas purchasers. "Over the last 10 years, they've always been a major player, but high levels today are due to the weak pound," he says.
"Even so, most people have been buying for a reason; maybe they've got children here at school or university, or they want a London base for their second or third home. It is not just a punt on the market."
Across the capital, estate agents are rejoicing. "We have had one of the most successful years in our 51-year history," reports Ed Mead, director of Douglas & Gordon, the largest independent estate agent in south west London. "What happened? The consumer credit bubble was supplanted by a government-sponsored one. Low interest rates and a currency crash mean the finite amount of good property in London has become even less."
An estate agent in the Chelsea area for 30 years, Mr Mead says: "Within that time, I've seen the market switch from being 20 per cent foreign buyers and 80 per cent domestic to the exact opposite. When foreigners buy London property, they tend to keep it for a generation. British buyers tend to sell it and trade up within three to four years. So you've got a lot of properties that once sold, don't appear again for a very long time." He sums up the supply problem thus: "The market's disappearing up its own backside."
Choke on supply
The effect of the supply:demand imbalance is plainly apparent in the average price polls – but why is there so little property on the market? "Supply of London homes over £750,000 has dropped by about 50 per cent since 2006," reports Peter Mackie, managing director of Property Vision, a subsidiary of HSBC private bank which acts as a 'buyer's broker' to wealthy property purchasers. At present, 50 per cent of Mr Mackie's clients are from overseas. “There is serious competition out there for anything really good; we run into it every day,” he says, adding he has heard of a £20m gazump on a prime London property in the last few days. "This reflects a very, very thinly traded market. However, I suspect that this imbalance is likely to change with vendors hoping to profit take based on 2007 values."
Mr Mackie reports that several international clients have put purchases on hold until after the general election, as they anticipate the pound will weaken further. Additionally, potential sellers are delaying putting properties on the market until the outcome of the election is known.
"I don't think reality has sunk in," he continues. "Supply has dropped by 50 per cent – that's why prices are going up. If supply goes up by 15 to 20 per cent, then I expect to see prices fall by the end of this year."
Election fever
Mr Meade agrees that election fever is causing the London market to catch a chill, noting the London market "always takes a pause for breath" before a general election. "Politics rarely has a lasting impact on the central London market," he says. "This market is far more skewed by exchange rates than interest rates or political change. If you're an Italian billionaire, you don't give a toss about who’s in power."
Usually, in March, Mr Meade will receive 25 instructions to sell property in Chelsea. So far this month, he's taken on just six. "That's dire," he exclaims, concurring that volumes of transactions in London have fallen "well over 50 per cent" since the peak. He also questions whether the astronomical price rises are sustainable. "On the better properties, estate agents are pricing themselves out of the market with higher and higher asking prices," he notes.
One of the groups whom Mr Meade says are largely absent from the London market are British buy-to-let buyers. Huge competition for property and the lack of affordable finance means new purchases don’t stack up. Ironically, the difficulty of buying a house has boosted the London rental market, with little new stock to meet rising demand. "I think central London rents will go up 20 per cent by the end of 2010 as there is such a lack of stock," he predicts.
With the twin forces of Easter holidays and May's anticipated election slowing down an already turgid market, the true effect on the capital's property prices is unlikely to become clear for a while. The London-led recovery in the national housing polls may have boosted the spirits of UK homeowners, but it is dangerous to believe in the law of averages - after all, a market where gazumps occur on £20m townhouses is far from the everyday. And if the London market starts to stall, the outlook for "everywhere else" is a worry.
